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If you depend on investment accounts for retirement income, you’ll have to pull money from them periodically to get cash for your everyday expenses. Those withdrawals will likely come from dividends, interest, mutual fund distributions and sales of securities. But how do you pick which source to draw upon?
Fix your mix
Think about the balance you want to maintain between the stocks and bonds (or stock funds and bond funds) in your portfolio — say, 50 percent of your money in each. If gains or losses on either side throw off your target mix by 5 percentage points or more (say, to 55 percent stocks and 45 percent bonds), rebalance by selling some of the overweight investment to restore the 50/50 split (or something close).
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Sell tax-deferred assets
If you’re entirely invested in mutual funds in your traditional individual retirement account (IRA) or 401(k), pulling money out is easy. That’s because no matter where you take your money from within these accounts — stock funds, bond funds or a cash balance — your withdrawals will all be taxed in the same manner: as ordinary income. Reach your dollar goal by selling stock or bond shares in a way that maintains or restores the investment balance that you desire.
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Use taxable interest and dividends
If you have taxable accounts (such as a brokerage account that holds stocks, bonds or funds but isn’t a 401(k) or IRA), start out by withdrawing this year’s income — interest, dividends, mutual fund distributions and realized capital gains. Then sell stocks or bonds to restore your desired investment balance, taking out the rest of the money you need. Always be sure to sell investments that you think have the least promise.
Hold off in bad times
When markets are down, think about skipping or reducing your annual withdrawal and living off the cash cushion you’ve already set aside.